The annualized rate of return is a helpful metric to use when evaluating past performance. While it is a useful tool, it should be considered along with other factors when making investment decisions. As is often stated in the financial world, past performance is not necessarily indicative of future performance.

1. Record annual returns over a set time period. The asset you track could be anything from a stock to a mutual fund to a commodity. Likewise, the time period could be any fixed length of time. For example, say you want to track returns on XYZ stock. Looking at historical prices, you see that XYZ has returned $4, $6, $3, $1, and $4 per share respectively over the last five years. Record these numbers, as they represent individual annual returns for the stock.

2. Add the annual returns together to record the total return for the time period. In the example of XYZ, the total return is $18 per share. This is the return in terms of dollars and cents, but it is not yet a rate of return.

3. Convert the total return to a rate of return. To find the rate of return, divide the return by the initial investment amount. Assuming XYZ initially traded at $20 per share, the total rate of return over the last five years is $18 / $20, or 90 percent.

4. Divide the total rate of return by the number of years tracked in the time period. If a stock has a 90 percent return over five years, the annualized rate of return is 90% / 5, or 18 percent. This is the average yearly return on investment for the time period tracked, which in this case is five years.

Things Needed

Price history

Calculator

Tip

If an investment steadily increases over a long time period, the rate of return will decrease over time because of the rising price of the investment.

Warning

About the Author

Adam Parker is a writer from Virginia. He holds a Bachelor of Science from James Madison University. Parker has written articles for online sources including The Motley Fool, Gameworld Network and Glossy News.